Potential buy within family

December 20, 2023

by a professional from Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM) in Verona, WI 53593, USA

A client of mine was recently invited to make an offer to buy a business from a close relative of his wife. Both businesses are in a very specialized field in dental appliances, so there is close alignment in the industry, but after a detailed review, the business for sale is targeting a lower-tier of the market with lower pricing but also cheaper materials and lower quality.

My doesn't want to cannibalize his own high-tier segment, so one thought is running the two brands separately for different clients in the same market. This means operating both businesses separately and reducing opportunities to consolidate costs. He is leaning towards declining the buyout, but also has to carefully articulate his message to avoid offending his extended family about their low-tier product line.

Looking for a broader perspective, please share yours.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Interesting situation. It does sound like there is a risk of cannibalizing his own business by combining the two. Does the other company have vendor relationships that might help him reduce his own prices so he can improve his margins that he could leverage? Although he might not be able to combined the companies directly, he could set up a holding company structure and combine certain cost centers like HR, accounting, etc. and get some cost savings out of it that way. Just a thought as I have seen other operators use that solution when they need to keep companies separate for one reason for another. You could potentially even combine benefits for employees into the holding company to bring down costs. Good luck with the decision.

Reply by an investor
from United States Naval Academy in Colleyville, TX 76034, USA

Own two completely different segments in the same market? Sounds like an awesome opportunity.

Yes, run as separate brands but that doesn't mean there still isn't opportunity to consolidate costs. Referencing the car comp above, the major car companies target customer segments with a well-consolidated cost base.

For something like this, there's probably cost opportunity in back office, shipping, common supplier scale (even if you're buying different products). Even if you run them separately, having a common knowledge base will make it easier to run.

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